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Chrisman's Corner: Good to Know the Differences

Many of JMAC’s brokers specialize in high balance loans that do not conform to Fannie Mae, Freddie Mac, or FHA guidelines. But a certain percentage of our brokers do many of these loans, and it is important to be able to explain to a borrower, “How does an FHA loan compare to a Conventional one?”
 
When discussing this option with clients, JMAC’s experienced brokers lay out the two different loan programs and each of their advantages. Since an FHA loan is guaranteed by the FHA, it’s easier for a borrower to qualify for an FHA loan (particularly first time home buyers).  Borrowers may be able to qualify for the loan program with a low credit score and lending requirements are less rigid on an FHA loan. A client’s debt-to-income ratio can be much higher on an FHA loan than a conventional loan, which helps young adults early on in their career qualify for a mortgage. 
 
Our brokers know that both FHA and conventional loans have low down payment requirements as in the past, many first time buyers were drawn towards FHA loans due to their 3.5 down payment requirement, but now the conventional 97 percent LTV mortgage will allow borrowers to put as little as 3 percent down. FHA loans often have lower interest rates than most conventional loans, but the rate spread will vary state by state. If a client puts less than 20 percent down on a mortgage, they will have to pay mortgage insurance (MI) regardless of the loan program, in order to protect the lender against losses if the borrower defaults. Paying for MI on an FHA loan wipes out the advantage most consumers would have from the lower interest rate that comes with an FHA mortgage. 
 
Lastly, JMAC’s brokers will point out that another drawback to an FHA loan is that the MI requirement is permanent for the life of the loan, whereas on a conventional loan, the borrower may be able to discontinue the MI once they have reached 25 percent equity in the home. Thus, a conventional loan payment may turn out to be lower than an FHA payment.